Lecture 04 - ECO100

Lecture 04 - ECO100 - Introduction to Economics Lecture 4...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 4: Lecture 4: Consumer Behaviour Consumer Behaviour
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© Gustavo Indart Slide 2 Consumer Behaviour Consumer Behaviour ± Why do demand curves have a negative slope? ± To answer this question we must study the behaviour of individual households or consumers ± In order to explain how households make their choices we will examine neoclassical indifference theory ± Suppose that John has a monthly income of $30 which he entirely spends on two commodities: movies and donuts. Movies cost $6 a ticket and donuts cost $3 a dozen ¾ How does John divide his $30 between movies and donuts?
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© Gustavo Indart Slide 3 Preferences Preferences ± In order to explain how households make their choices we will examine neoclassical indifference theory ± Let’s first introduce the concept of preferences ¾ Preferences are a person’s likes and dislikes ± There are three fundamental assumptions about preferences: ¾ preferences do not depend on the prices of the goods ¾ preferences do not depend on income ¾ more of any good is preferred to less of that good
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© Gustavo Indart Slide 4 Preferences Preferences (continued) (continued) ± Let’s consider how John’s decision about how to divide his monthly income of $30 between movies and donuts ¾ John consumes only movies and donuts, that is, he gets satisfaction only from consuming these two commodities ± If we don’t take into account income and prices, John may consider infinite combinations of movies and donuts for consumption ± In this way, he is able to arrange an infinite number of bundles according to his order of preference
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© Gustavo Indart Slide 5 Preferences Preferences (continued) (continued) ± John may indicate, for instance, that he prefers bundle A (2 movies and 5 dozens of donuts) to bundle B (1 movie and 10 dozens of donuts) ± This means that he obtains greater utility or satisfaction from consuming bundle A than from consuming bundle B ± He may also indicate that he is indifferent between consuming bundle C (3 movies and 10 dozens of donuts) and bundle D (4 movies and 5 dozens of donuts) ± This means that he obtains the same utility or satisfaction from consuming either bundle C or bundle D
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© Gustavo Indart Slide 6 Indifference Curves Indifference Curves ± If we put together all the combinations of movies and donuts that allow John to attain the same level of utility or satisfaction, we construct an indifference curve ± John is indifferent between any two points on this curve ± Given the assumption about preferences that more is preferred to less, indifference curves satisfy two conditions: ¾ their slope is negative ¾ they cannot intersect
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© Gustavo Indart Slide 7 Negative Slope of an Negative Slope of an Indifference Curve Indifference Curve D M A The assumption that more is preferred to less assures that the indifference curve will have a negative slope.
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This note was uploaded on 08/27/2008 for the course ECO 100 taught by Professor Indart during the Summer '08 term at University of Toronto.

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Lecture 04 - ECO100 - Introduction to Economics Lecture 4...

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